China’s excess industrial capacity will have a “corrosive” impact on its future growth and efficiency unless it is reduced, US Treasury secretary Jack Lew said on Sunday, adding that it was also causing distortions in global markets.

Lew, speaking to students in Beijing, made the remarks ahead of talks with senior Chinese officials starting on Monday.

“Excess capacity is not just a domestic issue in China,” Lew said. “The question of excess capacity is one that literally has an enormous effect on global markets for things like steel and aluminium, and we’re seeing distortions in global markets because of excess capacity.”

EU to investigate Chinese steel subsidies blamed for dumping

Read more

The US Commerce Department has imposed anti-dumping and anti-subsidy duties on a wide-range of Chinese steel products, while US business groups have complained about new Chinese regulations they say favour local firms.

China has criticised US anti-dumping duties targeting Chinese steelmakers as irrational and harmful to diplomatic ties. Beijing has said it needs time to address its excess capacity problem.

Lew also said it would be “problematic” if China’s currency only went down over time, saying he still believed currency markets were not disorderly.

But he said that the US Treasury did not designate China as a currency manipulator in its most recent currency report because its most recent currency intervention had not been one-sided.

China’s currency interventions, once an irritant in the relationship between the world’s two largest economies, has become relatively low profile since China allowed the yuan to rise in recent years in line with market forces and pledged to refrain from competitive devaluations.

Lew said he hoped talks between US and Chinese officials on excess industrial capacity would be as fruitful as those on currency policy.

Lew said he believed China and the United States could make progress in opening China’s financial and healthcare sectors.